Crypto tax situation - Read post 1 for thread banned users

I think it's from first principles.

As far as I understand staking — which, to be fair might not be very far — it works like this:

• To engage in crypto staking, you have to actually own some crypto.
• You commit to making your crypto available to help support the operation or security of a blockchain network.
• While this commitment continues, your crypto is effectively locked up. You can't use it for other purposes, e.g. by trading it.
• You do this in the hope or expectation of reward — effectively, you're paid for the use of your crypto. The reward could be in cash, or it could be in an allocation of additional crypto
• The reward is somewhat variable — there's an element of randomness in when, or how often, your staked crypto is actually use for the purpose for which you have made it available, and in how much is generated by each use of the crypto, and this in turn means there's an element of randomness in the reward.
• Losses are possible.

As we know, there are few or no tax regulations that apply to crypto specifically; transactions involving crypto are taxed under the general rules that apply to transactions involving other assets.

With crypto staking, effectively you're earning money by making your asset available to others to use. In economic terms, it's not that different from lending money, or hiring out plant and machinery. You could argue that your staking income is taxed on this basis, in which case it's subject to income tax as "miscellanous income" under Taxes Consolidation Act 1997 Schedule D Case IV.

But one difference from a typical renting-out is that the return you earn is to some extent dependent on how your staked crypto is used — you have an interest in the use made of your crypto to support the system, and you participate the amounts generated by that use. On this view you're not really renting out your crypto — you're letting it be used on your behalf in operations that support the system, and also generate a return that you will receive a part of. If you take that view, then crypto staking is an "adventure in the nature of a trade", and the amount you earn is subject to income tax under Schedule D Case I.

If you want to know which of these applies, you can seek a ruling from the Revenue Commissioners. But it makes no difference in terms of the amount of income tax you will owe.

It's hard to argue that staking income should be subject to CGT, because CGT arises on the disposal of an asset, and with staking there is no disposal — at the end of the staking period, you still own your crypto.

Working again from first principles:

One of my main issues is do I have to pay taxes on staking rewards I haven't collected yet? Do I need to be in control, for example holding it in my wallet.

I think in general the Revenue Commissioners are happy for you to report your income tax affairs either

• on an "accruals basis": you report income when you become entitled to it, and claim deductible expenses when you become obliged to pay them; or
• on a "cash basis"; you report income when you actually receive it or it is credited to your account (in this case, your wallet) and claim deductible expense when you actually pay them or they are debited to your account.

You can choose whichever basis suits you. But, whichever basis you adopt, you have to use it consistently, for all your income and expenses.

Is slippage and other costs taken into account when making trades? It's hard to find a single source of official information on how this is handled.

Generally, the costs incurred wholly and exclusively in connection with the income-yielding transaction will be decuctible.

"Slippage", if I understand matters correctly, is something different. Basically, slippage is what happens when you receive slightlyl less from a staking exercise than you expected to receive. The Revenue don't care what you expected to receive; they only care what you actually receive. So you just report the slipped price as income. (This works both ways; if you recieve more than you expected, you still have to report what you received, not what you expected.)

Treating crypto as a security doesn't necessarily mean that any return you get for your crypto is going to be taxed as a capital gain.

I take the point that, e.g., bonus issues of shares are simply added to the existing holding, at the original cost base, and then subject to CGT only when you dispose of the holding, or part of it. But are the rewards of staking analogous to bonus shares? You get bonus shares simply because you hold some shares already; that's not true of staking, where you are being rewarded for allowing the use of your crypto.

With conventional securities, you can engage in "securities lending", whereby you transfer your securities for a limited period to a borrower (often a financial institution or short seller). You get your securities back at the end of the period (not necessarily the same securities, but the same number of the same class of securities) plus you get a reward for lending them. The reward is taxed as income (and would be, even if the reward were not paid in cash but in the form of additional securities). Is staking perhaps more analogous to securities lending than it is to bonus issues? There may be no formal transfer of ownership with staking, but I don't think that's definitive. The key poin is that somebody else gets to control and use your crypto, and you get paid for that.

Of course, it would be very easy for revenue to create rule that do anything. They could say tokens generated from staking are income. The ATO in Australia have done that. But Revenue have not done that. And until they do, I don't see why anyone would choose that less favourable option

Because it's not actually a choice? The question you (and the Revenue) are asking yourselves is not "how would I like these to be taxed?" but "what outcome do the provisions of the Taxes Acts produce, when applied to these transactions?". It's not a policy question; it's a question of statutory interpretation.

I accept that there's genuine doubt here, and when faced with questions of doubt, we are inclined to prefer the answers that produce the outcome we like over the answers that produce the outcome we don't like. But that's not a relevant consideration. If this ever goes to a court or a tribunal, the court or tribunal will not consider that factor at all. I get the attraction of saying "choose the more favourable answer", but at the very least you need to do that with your eyes open to the reality that this has nothing at all do to with whether it's the right answer. If we're looking for the right answer to the question "how are staking returns taxed?", the word "favourable" will not appear at all.

Crypto is a nouvelle instrument. So there are not going to be perfect parallels in traditional stocks.

Granted. Which is why we have to look through the treatment of traditional stocks to the underlying principles and rationale in the legislation that produces the particular tax treatement that stocks enjoy, and ask ourselves what outcome those principles, that rationale, might produce when applies to these novel transactions.

With staking, your shares are not controlled or use by anyone else. Nobody is using them, or controlling them.
They are simply locked into the pool, for as long or an short as you like (rules vary).
Importantly, the generation of new assets is not a payment from a contracted user of your shares. But a pro-rata distribution to all users with locked shares in a pool.

Crypto lending exists. It's works exactly like security lending.
Which is why I think staking is a closer parallel to bonus shares. Staking is simply the opt in act.

You say this literally in the same breath as pointing out why staking isn't a parallel with bonus shares. Bonus shares don't involve any lock-in. There is no "opt-in act". With staking, your crypto is locked in for some purpose. (As far as I understand it, that purpose is to help secure the blockchain and validate transactions, but I don't think it actually matters what the purpose is.) You are rewarded not for owning the crypto, but for allowing it to be locked in in support of that purpose. That's not very like what happens with bonus shares. It's more like what happens with securities lending, even though there's no actual transfer of your crypto to another holder.